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Profits of Gold Price Manipulation

From where I sit, the POG and the market in which it is traded has yielded a bonanza for some market participants.

My view from the bridge goes something like this…

A few years ago, some bright spark (let's call him BS), figured that there were tons of gold sitting idle in the Central Banks of the World.

All BS had to do was figure out how he could get a piece of the action. By convincing bank no.1 that, if they would lend him say 10 tons of gold at a 1% per annum fee, he would borrow the gold and later give it back. But BS added a little twist. BS would require title to the gold, so he could sell it and use the proceeds as he sought fit. All the bank needed to do was to be sure that BS had the ability to repay the gold at some point, and he had a deal.

So BS convinced the bank that, based on the asset backing of the borrower, they need have no concern. The bank agreed, and the deal was done.

So, BS borrowed 10 tons of gold and sold it.

At this point of time, gold was $450 per oz and BS had borrowed 320,000oz (10 tons) and sold it for $450 per oz - and put the proceeds into US Treasury Bills at 5%. BS had banked $144,000,000, and was paying 1% interest to the gold bank and was earning a profit of 4% or $5,760,000 per annum.

Not a bad little earner!

And almost risk free - so long as the POG stayed below $450 per oz.

Whilst skiing in Europe on the proceeds, BS thought he might have another dip at this pond of good fortune.

So BS goes to another bank and offers them a similar deal.

And, bingo, they let him on for the ride.

But this time, not for 10 tons. OH NO! We are at the trough now, consequently, he asks for 20 tons.

Deal is done.

This time, BS sells the 640,000 oz (20 tons at 32000 per ton) at $425 per oz as the price of gold has slipped a little. From this transaction, BS banks $272,000,000, pays 1% interest and invests the proceeds in something a little more risky, earning 6% for a margin of 5% and earns $13,600,000 per annum.

From these two transactions, BS is earning $19,360,000 per annum almost risk free.

Back to the ski slopes!

That nagging feeling that they might go for it again, gets our intrepid dealer back to the office for another dip in the pond.

But this time BS goes for the jugular!

And asks for 200 tons!

The deal is done!

BS banks $2,400,000,000 from selling the 200 tons at $375 per oz as the price of gold has slipped again. BS pays the 1%… and now invests the proceeds at a slightly riskier 8% earning a margin of 7% or a lazy $168,000,000 per annum! Taking the proceeds to an amazing $187,360,000 per annum!

But now BS is concerned about the element of risk because the only thing that can bring him back from skiing in Europe or parking the 260-footer in pen 1A at Monte Carlo is the slight risk that the POG will go up.

So, thinking as he skis, BS decides that he could:

a). Hedge the risk himself, or

b). Encourage gold miners to sell forward and thus increase the forward supplies of gold, or

c). Create negative sentiment about the POG, or

d). Encourage other owners (eg Governments) to sell gold to increase supply, or

e). All of the above.

If he can do this then he can keep going with this nice little earner.

And BS can.

So, flushed with success, BS winds this little capper up like a top - and over the following couple of years takes to this scheme with a passion. BS progressively sells 10,000 tons of gold at an average price of $375, and has a balance sheet that looks like this:

Cash reserves from sales $120,000,000,000

Average Interest Differential 6%

Annual income $7,200,000,000

Not a bad little earner!

Pretty good for a kid that failed high school - but who cares. If it goes off the rails, it's so big, Uncle Sam will have to bail me out.

So, it's off to Europe for another season!

However, as knowledgeable as BS is about the gold market and the best way to play it, he has undertaken this game at the worst time in modern civilization. Unbeknown to BS as he racked up this little earner, the long term trend of the world economies was topping out. A wave of calamities was slowly but surely unfolding. The long term trends of prosperity were turning into the mire of decay. As these events unfolded, the investment community, with many trillions of dollars at their disposal, was becoming discouraged by the world economic events. A wave of concern was going to seek the haven of bullet proof investments. And, unfortunately for BS, GOLD was to be the key.

As the sentiment turned, BS tried to unscramble his positions!

But he was caught - and the good little earner assisted in the most remarkable turn around in investor sentiment towards gold.

Because the providers of the gold wanted it back.

And BS couldn't buy enough of it.

No more Europe, no more skiing. BS had to sell the 260-footer to a Taiwan fish monger - and Uncle Sam had to foot the bill!

Was the market manipulated?

I don't think so, it's just that BS got greedy!

Stephen Barrett
Melbourne - Australia

Mr. Barrett is a private commodity trader, looking for "a nice little earner"

6 December 2001